Banks brace for slower loan growth, weaker asset quality as reporting season rolls in

Watch out for bad SME and China-related loans.

Shareholders of the country’s three biggest banks should be on the lookout for slower loan growth and weaker asset quality when the big three begins reporting their first quarter results next week.

Analysts warned that loan growth could disappoint for a number of reasons, such as the recent interest rate hike, aggressive monetary easing in China, and the continued weakness of commodity prices.

“We believe loan growth could disappoint vs our 1.3-1.5% q/q estimate for 1Q15, affected by slowing trade finance given the recent decline in commodity prices and monetary easing in China, which could dampen demand from Chinese corporates to borrow offshore,” stated Barclays analysts Sharnie Wong and Evian Wong in a report.

Meanwhile, Maybank Kim Eng analysts Ng Wee Siang and Ng Lee Hiang noted that consensus loan-growth projections remain conservative on back of the weak economy.

“While banks may cut their loan-growth guidance during this results season, we expect 3ppt cuts to 4-5%, at most. Moreover, our loan-growth projections are conservative, at 7% for the year vs +9.5% last year. The Street is also not that aggressive, anticipating around 7-8%,” they noted.

Apart from weak loan growth, investors should also brace for patches of weak asset quality, as higher interest rates typically impact repayment ability.

“We may see pockets of weakness in the SME and China-related loan portfolio. We expect credit cost to normalise upwards over time from the current low level,” Barclays reported.

“Although sporadic weakness can be expected, we think it is too early to detect any stress as interest rates have only started to rise. Banks had also set aside more buffers for lumpy provisions in 4Q14. Liquidity should remain good,” added Maybank Kim Eng.